The Luxury Investment Index

Wealthy investors worldwide are looking for assets that satisfy both head and heart. Our latest Index maps the place where investment meets personal passion.

Last year was a combination of relative moderation and charitable deeds for the global rich, according to the results of The Wealth Report’s annual Attitudes Survey of private bankers and wealth advisors. A net balance of almost 10% of respondents said their clients had increased their spending on philanthropic activities in 2012, while globally just 1% increased their spending on luxury goods.

The slowdown in overall spending levels is hardly surprising, given the economic uncertainty gripping large parts of the world. Russia, North America and Europe all saw a drop in luxury retail therapy. More unexpected, perhaps, was that philanthropy did not follow suit.

However, Maya Prabhu, who heads up Philanthropy Advisory Services at Coutts, does not see a discrepancy. “The wealthy don’t live in a vacuum; having a healthy society around them is good for their well-being as well as their wealth. You could call it a mixture of enlightened self-interest and compassion.”

Increasingly, philanthropy is also being used as an important tool to help the children of wealthy individuals develop their financial skills in readiness for taking over the family fortune or business, says Ms Prabhu. “This approach can be very beneficial for families as it helps them to work out what they really care about.”

Newer forms of hands-on philanthropy, such as impact investing and venture philanthropy, are attracting younger, entrepreneurial HNWIs who relish combining their charitable activities with their business skills, she adds.

Of course, the whole world hasn’t stopped spending. Across Asia, a net balance of 19% of HNWIs spent more last year on luxury goods than in 2011, helping to make Chinese liquor brand Moutai the world’s fourth most valuable luxury brand with a value of $12bn, according to China’s Hurun Report.

James Lawson, head of industry analyst Ledbury Research, says this is also clearly reflected in the number of new luxury store and boutique openings around the world.

The firm’s research shows that Asia-Pacific’s share of the world’s leading luxury brand outlets increased from 39% in 2009 to 44% in 2012, while North America’s fell from 30% to 24%. Although Europe’s quota remained relatively stable, this was “not due to European consumers, but to tourists and their passion for shopping in the luxury capitals of Milan, Paris, and London,” says Mr Lawson.

Australia’s luxury market also benefits from this trend, with an increase in spending by tourists from China and other regional hotspots like Indonesia and Malaysia, according to Melinda O’Rourke, Managing Director of Sydney-based luxury consultancy MO Luxury.

However, Ms O’Rourke says Australians still account for 65% of luxury purchases, and relying too heavily on overseas wallets is a risky strategy. “The industry here learned a hard lesson after the Japanese economy stagnated.”

Getting personal

Investments of passion, such as art, wine and classic cars, occupy a unique and fascinating niche that combines aspects of luxury spending with collecting and investing.

The wealthy have always enjoyed collecting precious or interesting objects, often on an epic scale, but the desire to acquire has become even more widespread following rapid wealth creation in emerging markets. According to China’s Hurun Report, 64% of the country’s millionaires are currently building collections.

A number of super-prime developments targeting the global super-rich, such as Oliver Burns’ Walpole Mayfair near London’s Ritz Hotel, are integrating display cabinets for art and collectables into their designs. Janine Stone of the eponymous architectural and interior design firm says one of her most interesting briefs was to incorporate a gallery for a Russian client’s modern art collection into a project.

However, it is their potential as an alternative to traditional investment asset classes that is raising the profile of collectables. But, despite this flurry of interest, they still only account, on average, for 4% of HNWI investment portfolios, according to The Wealth Report’s annual Attitudes Survey of private bankers and wealth advisors.

This relatively low proportion highlights the grey area occupied by these “emotional” assets. To some HNWIs and their advisors they will be pure investments, to others they will be personal passions, while for many they will be a combination of the two.

When asked to select the most collected passion investments, respondents in all regions of the world chose fine art. Art was also the sector where spending activity increased the most last year, with a net balance of 19% of respondents predicting clients to spend more on art in 2012 and 13% expecting the trend to continue into 2013.

The next most-collected asset overall was watches. The average Chinese super-rich male owns six luxury timepieces, according to Hurun. In November 2012, an Asian collector bought a platinum chronograph Patek Philippe wristwatch owned by British rock guitarist Eric Clapton for the equivalent of US$3.6m at a Christie’s sale in Geneva. Wine was the third most popular passion investment, scoring highly in all areas bar the Middle East. Jewellery and classic cars complete our global top five.

Although in most parts of the world stamps ranked as the least collected investment of passion, Keith Heddle, Investment Director at Stanley Gibbons, says philately is definitely on the up among HNWIs, including in China. “Chairman Mao banned stamp collecting as bourgeois; now there is a resurgence,” he says.

As with art, collectors in emerging nations tend to be patriotic when choosing what to buy and this can cause local markets to overheat, adds Mr Heddle. By contrast, most serious investors have very little interest in the stamps themselves, he says. “They have often just been badly burned by more traditional investments.”

Picture this

One of the main trends driving the markets for investments of passion is the ever-increasing globalisation of wealth, and no asset sector epitomises this better than the world of fine art, according to data compiled for The Wealth Report by art advisory firm 1858 Ltd.

“China is now the world’s largest market for art,” says Viola Raikhel-Bolot, the firm’s Head of International Art Advisory. China’s share of the global market in 2011 was 30%, up from 23% in 2010, compared with 29% for the US (down 5%) and 22% for the UK.

The huge spending power of HNWIs from China and other growing economies has helped the art market recover rapidly from the credit crunch, says Mrs Raikhel-Bolot. “It took almost 10 years for things to return to normal after the 1990s recession, but sales in 2011 were already almost back to the 2007 peak of US$66bn.”

Although the spending power of the Chinese is waning slightly, this has given collectors from other parts of Asia and further afield the opportunity to flex their muscles in the Hong Kong sale rooms, says Mrs Raikhel-Bolot. “Two of the top lots in Sotheby’s Contemporary Asian sale last autumn went to Westerners. The top lot, Zhang Xiaogang’s Tiananmen No. 1, sold to a European collector for US$2.7m.”

Modern art (from 1863 to 1945) accounts for over 50% of auction sales in both China and the rest of the world (see p53). The world’s two top-selling artists at auction in 2011 were both Chinese modernists: Zhang Daqian and Qi Baishi.

Other Asian artists are also selling well: Fortune and Longevity by Indonesia’s Lee Man Fong fetched US$4.4m last year, a new South-East Asian record. In terms of prices, contemporary art (1970 to the present) has seen the biggest growth over recent decades and this trend continued in 2012.

Sotheby’s (US$375m) and Christie’s (US$412m) set new sale records at their November auctions in New York. Personal bests were also achieved by a number of artists including Jackson Pollock (US$40m), Franz Kline (US$40m) and Jeff Koons (US$34m), while Mark Rothko’s No. 1 (Royal Red and Blue) made over US$75m.

The past 12 months have seen a slight shift towards other previously undervalued sectors and genres, like contemporary Indonesian art, says Mrs Raikhel-Bolot. “Asian buyers are actively collecting older works, not only from their own culture. They are acquiring the finest examples of Western art, with 17th-century Dutch paintings particularly popular.”

Picasso, though, remains a firm favourite in the region, she notes, with his Femme Lisant (Deux Personnages) selling for US$21.3m to an Asian bidder at Sotheby’s New York in May 2011.

The Luxury Index

Our new index brings a scientific approach to the art of passion investment, providing vital data on the performance of the most popular assets

Over the 10 years to the end of Q3 2012, the index grew by 175%, considerably better than the 54% rise in the UK’s FTSE 100 index of leading shares over the same period, even taking into account the value of any dividends paid.

Equities did perform better in the shorter term, rallying 10% year-on-year against a 6% rise for the index. However, where investments of passion really seem to show their value is when mainstream investments are most vulnerable.

Over the past five years, which have included the collapse of Lehman’s and the ensuing credit crunch and economic slowdown, the index returned solid growth of 64%. During the same period the value of equities fell 6%.

% Price growth to Q3 2012

1-year

5-year

10-year

Classic cars

23%

115%

395%

Coins

25%

93%

248%

Stamps

9%

72%

216%

Art

0%

92%

199%

Wine

-19%

7%

166%

Jewellery

2%

60%

144%

Chinese ceramics

0.4%

54%

85%

Watches

8%

27%

76%

Furniture

-9%

-12%

-18%

Knight Frank Luxury Investment Index

6%

64%

175%

Looking at the constituent parts of the Luxury Investment Index, all but one asset type increased in value over 10 years (see table above), with the Historic Automobile Group International (HAGI) classic car index up by a staggering 395%. Dietrich Hatlapa, HAGI founder and author of Better Than Gold: Investing in Historic Cars, says a relatively small pool of truly investment grade cars, plus growing global demand, has helped to push up prices.

Unlike some other investments of passion, cars can also act as a ticket to a particular lifestyle, says Mr Hatlapa. “Buyers from overseas will often leave their cars where they were bought and then fly back to drive them at rallies and events.”

Also more than tripling in value were the Stanley Gibbons coin index (248%) and its GB30 stamps index (216%), while a composite index of the most collectable art genres produced by Art Market Research only just missed out at 199%.

But performance doesn’t always go hand-in-hand with popularity. In our Attitudes Survey, stamps and coins were the least collected items by HNWIs. Watches polled second only to art, but showed a comparatively lowly 10-year rise in value of just 76%. The disparity shows the often blurred dividing line between investments and passion. While many HNWI watch collectors may believe, or at least hope, that their acquisitions will be a good investment, the reality may disappoint.

“The actual number of watches that will increase in value is somewhat limited and largely restricted to vintage watches and some modern models by Rolex and Patek Philippe,” says Paul Maudsley, head of the watch department at auctioneer Bonhams. “Paying £150,000 retail for a new watch is rather like buying a luxury car. Its value will fall as soon as it leaves the showroom and, with the exception of a Patek Philippe, is unlikely to ever be as high again.”

Caveat emptor

Although the returns may look attractive, Greg Davies, Head of Behavioural Finance at Barclays Wealth and Investment Management, says potential investors need to look beyond the headlines before diving into investments of passion.

“People often think these types of investments are more transparent and less complicated than traditional investments. In reality, they are generally less regulated, and can be illiquid, expensive to trade and sometimes actually more difficult to understand unless you have a high level of expertise or inside knowledge,” he says.

Art is a classic example, he adds. “The huge diversity of the market, the fact that no two original works of art are the same, changes in taste and fashion and the lack of repeat sales mean even the most rigorously constructed index can only provide a small, and curated, glimpse of the market.”

Fittingly, fine wine can be one of the more liquid and transparent investments of passion, according to Dr Davies. That statement is backed up by Andrew della Casa, Director of The Wine Investment Fund. “Every day a case of each of the wines we include in our fund is sold somewhere around the world,” he says. “This ensures that there is always a bid/offer spread and it is easy to sell at any time.”

Although the Liv-ex 100 Index dropped 19% in the 12 months to September 2012, this was mainly due to the performance of one wine. “The biggest constituent in the index – and its biggest faller – was Chateau Lafite. It was the brand of choice for Chinese buyers and they and other buyers drove prices up, creating a bubble. Now they have broadened their palates, the market has over-corrected and we see this as a good buying opportunity,” says Mr della Casa.

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The Wealth Report provides the definitive global perspective on prime property and wealth. It includes a guide to the performance of the world’s key luxury residential markets and HNWI growth forecasts over the next decade for over 80 countries and cities.